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In 1993, James Carville, President Bill Clinton’s political strategist, said that “if there was reincarnation,” he’d like to return as the bond market, because then he could “intimidate everybody.” Today, with interest rates historically low, the fantasy of choice would no doubt be to come back as the oil market, which intimidates even the U.S. government.

Cargo ships in the Persian Gulf in December

EPA / ABEDIN TAHERKENAREH / LANDOV

Fear of the oil market and its impact on the fragile U.S. and global economy is seemingly a driving factor in the Obama administration’s Iran policy. The administration cited that fear in opposing and then weakening legislation that would sanction Iran’s Central Bank and in belittling the prospects for a U.S. military attack on Iran’s nuclear facilities. While the administration is right to be concerned, it should take a longer view. A fuller analysis of the oil market suggests that allowing Iran to develop nuclear weapons capability would produce higher oil prices for a longer duration than would either action taken to prevent it.

On December 1 the Senate voted 100-0 in favor of legislation sponsored by Senators Mark Kirk and Robert Menendez that would sanction companies that deal with the Central Bank of Iran (CBI). A primary purpose of the legislation was to undercut Iran’s oil exports, which are financed through the CBI and supply more than half of Iran’s state revenue. This was a notable achievement. Many considered CBI sanctions the “nuclear option” of sanctions and the best possible, and perhaps last available, means short of military action to prevent a nuclear Iran. The administration, however, opposed this legislation, partly out of concern that it would reduce the supply of oil in the market, driving prices up and undermining the fragile global economy—this at a time President Obama is focused on reelection.

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The administration managed to persuade the bill’s authors to weaken the legislation, which finally passed both congressional chambers on December 15. Obama signed it on December 31. It gave the president greater discretion over whether and what sort of sanctions to impose on financial institutions dealing with the CBI. Sanctions would take effect six months after the legislation is signed into law. The president can grant exemptions to financial institutions whose parent countries are cooperating with U.S. policy toward Iran, and can waive sanctions altogether if it is “in the national security interest” of the United States. The administration must inform Congress bimonthly whether there is sufficient non-Iranian oil supply to allow foreign buyers of Iranian crude to reduce their purchases from Iran significantly. There is another round of potentially tough sanctions legislation that could pass this spring, which includes sanctioning the CBI if it is determined to be supporting Iran’s weapons of mass destruction or terrorism.

For these sanctions to exert any meaningful pressure on Iran, international support will be crucial since American companies already do not purchase Iranian oil. Instead, almost three-quarters of Iranian oil exports in the first 11 months of 2011 were purchased by four countries: China (27 percent), India (18 percent), South Korea (12 percent), and Japan (16 percent). The European Union bought only a little more than India (22 percent), with Italy the largest buyer (8 percent). Only if the four main Asian buyers stop buying Iranian oil will Iran’s revenue truly suffer. If these Asian countries do not reduce or cease their oil purchases from Iran and some European countries do (those countries now indicating support for an import ban account for 5-12 percent of Iranian oil exports), Iran will be forced to sell more oil to Asia. With greater leverage, the Asian buyers will likely demand a discount. This will reduce Iran’s oil revenue but not enough to force Tehran to cease its nuclear program.

The administration reportedly has already asked these Asian countries to reduce their Iranian oil purchases. The Saudi oil minister has said, and his country’s oil production numbers confirm, that they will provide what their customers and the market need. A former senior Obama administration official has said the Saudis have offered to make up for some of the Iranian supply. (Saudi Arabian oil is comparable to Iran’s and could mostly replace it—in contrast to the very high-quality Libyan oil lost during its recent civil war, which was irreplaceable and led to a spike in oil prices.) U.S. requests have largely gone ignored, though South Korea is reportedly considering reducing or stopping its import of Iranian oil.